4 Steps To A More Secure Investment Portfolio For Your Retirement

Understand the hidden risks in your portfolio

When asked to identify what forces pose risks on
investment returns, few investors recognize inflation as a likely
counterpart. Yet for traditionally
risk-averse retirees, increasing consumer prices often pose the greatest risk
of all. Older investors have
historically favored lower-yielding investments such as CD’s, money market
accounts and T-bills which have a far lesser chance of maintaining purchasing
power. Inflation is expected to inch
upward as the economy gains its footing, therefore investment portfolios must
be tailored accordingly.

Be willing to diversify

Investors must be “willing” to diversify. Diversification is necessary due to current
high stock market valuations and a 40 year low point in the interest rate
cycle. It is important to look beyond
traditional stock and bond allocations to find steady, less risky returns. True diversification is the process of
spreading investment funds across asset classes that tend not to move in
tandem. While large and small U.S.
stocks move in nearly identical patterns, asset classes such as REITs (real
estate securities), commodities and hedge-like investments exhibit a
non-similar return pattern to the S&P 500.
The combination of these investments in conjunction with bonds and large
U.S. stocks helps protect the overall portfolio in troubling market conditions,
yet participate in market gains.
Portfolios built on this premise are likely to earn returns typically
associated with stocks, while exhibiting far less risk in fact almost bond-like
risk levels.

Understand the relationship between bonds and interest rates

There is no doubt that fixed income investments play a
critical role in the formation of a retiree’s portfolio. However, the pricing of nearly any fixed
income instrument is directly related to movements in interest rates. Prices of bonds go down as interest rates
rise. Unfortunately for those currently
nearing retirement, this can have a dramatic effect. With rates at near forty-year lows, it may only be a matter of
time before bond prices begin to crumble as interest rates rise. It is important to note, however, that not
all fixed income investments have the same sensitivity to interest rate
fluctuations. Some fixed income
vehicles such as bank loan funds, stable value funds, and Treasury
Inflation-Protected Securities (TIPS) adjust their values in the same direction
as interest rates. Investors facing
retirement should examine the fixed income investments in their portfolio to
determine how sensitive they may be to shifts in interest rates.

Make tax-efficiency a priority

Even in retirement, the lack of tax efficiency remains one
of the biggest detriments to overall portfolio performance. The following are a few tips to increase
efficiency:

Keep detailed
records of cost basis – this enables investors to identify specific share
lots for the tax-efficient selling of gains, and the timely harvesting of
losses

Do
not reinvest dividends – this allows for an easier and more tax-efficient
portfolio rebalancing as well as provides cash to live on, and spares
investors from a tax-basis paperwork nightmare

Be
aware of asset location – fixed income investment, hedge-like investments
and REITs, where possible, should go in tax-advantaged accounts because
the majority of their return is made up of ordinary income, while equities
are prime candidates for taxable accounts

Building a portfolio that takes into account both hidden and
obvious risks, diversifying to minimize those risks, and avoiding unnecessary
income taxes will provide a safe and secure retirement.

For further information, contact
Diane M. Pearson, CFP™ at (412) 635-9210 or e-mail her at legend@legend-financial.com.